GE’s smart (and subsidized) appliances

New smart appliances from GE will do great things. They will save energy, reduce greenhouse gases, curb  demand for power on the utility grid, generate “green jobs” in America and—oh, I almost forgot—clean your clothes, wash your dishes and keep your ice cream from melting.

GE's smart best-in-class hybrid water heater

GE’s smart best-in-class hybrid water heater

They will also be financed, in part, with your tax dollars, if, as seems likely, the company has its way. Incentives for manufacturers like GE that make super-efficient appliances are already part of the Waxman-Markey climate-change bill awaiting action in the U.S. Senate. As GE explained it, the government would provide “awards” to best-in-class appliances of $75 per dishwasher, $200 per refrigerator and $300 per water heater, paid directly to the manufacturers. As I read the bill (and I could be wrong, since it’s not easy reading), the government would also pay retailers who sell best-in-class appliances.

Did you know that the government was going to subsidize appliance manufacturers? Me neither.

Last week, GE executives came to Washington to talk with government officials and reporters about their smart appliances. When combined with a smart electricity meter, a smart grid and distributed renewable energy, GE’s water heaters, washers, dryers, dishwashers, refrigerators and stoves would help enable the company to provide zero net energy homes by 2015. That’s very cool. (Here are details from GE.)

While appliances are not the most exciting or profitable of GE’s businesses—the company tried, without success, to sell off its appliance business a couple of years ago—GE does have a history of innovation in the business. GE gave us the first self-cleaning oven, the first fully automatic clothes washer and the first refrigerator that dispensed ice and water through the door (which saves energy along with wear and tear on the biceps muscle).

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Kites, Coal and Waxman-Markey

If nothing else, the Waxman-Markey climate change bill is keeping the think tanks and Washington lobbyists busy. I’ve been surveying analyses and comment from critics including The Heritage Foundation (“a massive energy tax in disguise that promises job losses, income cuts, and a sharp left turn toward big government”), former Lotus CEO Jim Manzi in The National Review (“a terrible deal for American taxpayers”), the U.S. Chamber of Commerce (“expensive, complicated, regulation-heavy, domestic-only legislation”), The Breakthrough Institute (“may allow American emissions to continue to rise for up to twenty years”) as well as Greenpeace (“not strong enough to stop global warming”) and Friends of the Earth (“we have serious concerns and misgivings that prevent us from offering our support”). Now we are getting analyses of the analyses, such as the NRDC’s Laurie Johnson’s persuasive takedown of Heritage’s work. Lest you think that the climate-change bill lacks supporters, supporters last week released a list of backers that includes a broad swath of corporate America (GE, GM, PG&E, Exelon, Duke Energy, Shell, Starbucks and Nike), labor (the UAW, United Mineworkers, SEIU) and nonprofits (NRDC, Sierra Club, World Wildlife Fund, League of Women Voters, Consumers Union, National Wildlife Federation, etc.)

Inevitably, these analyses depend upon making numerous assumptions, stretching many years into the future, about trends and events that are inherently unpredictable:  GDP growth, energy supply, energy prices, geopolitical forces, the efficacy of domestic and international offsets and especially technology breakthroughs. What if Toyota, Ford or the Chinese company BYD quickly figure out how to build cheap electric cars? What if jatropha turns out to be an ideal biofuel? What if tidal  power or geothermal energy or something truly far-fetched — “clean coal,” maybe – turns out to be an affordable source of clean energy?

Or consider kites. Just the other day, I watched this mind-stretching TED talk by Saul Griffith of start-up Makani Power about the energy-generating power of high-altitude super-sized kites. Makani’s backers include Google, and the company is hard at work on Maui making kites that generate enough electricity to power several homes. (No word on whether Makani’s Hawaii office  is hiring.) “This is the dawn of a new age of kites,” Griffith says.  “This is a story about the audacious plans of young people with these dreams…I think we need to support all of the dreams of the kids out there doing these crazy things.”

makani_kite
What does Waxman-Markey have to say about kites? Nothing, it turns out. (No, I haven’t read the 932-page bill, but I did a search for the word kites) That’s actually a good thing. By contrast, the bill has at least 40 references to coal, as best as I can tell. According to this summary of the bill by House staffers provided by the tireless blogger and climate expert Joe Romm, the bill provides an estimated $60 billion in investments in carbon capture and sequestration technology and it uses a mix of “regulatory requirements and financial incentives” to ensure that new coal-fired power plants will operate with carbon capture and sequestration (CCS) technology. For example, Waxman-Markey decrees that…

Coal plants permitted between 2009 and 2015 lose eligibility for federal financial assistance if they do not retrofit CCS within five years after commencing operations; if they do not retrofit CCS by this date, they must retrofit CCS by no later than 2025 without federal financial assistance. The 2025 retrofit deadline is accelerated if four gigawatts of electricity generation is deployed with CCS before 2025; it may also be extended by EPA by up to 18 months on a case-by-case basis.

This is the kind of thing that worries me about Waxman-Markey in particular and about the willingness of the Obama administration more generally to manage so much of the economy—energy, autos, financial services. It’s hard, nay, impossible to know if CCS is a smart, workable and affordable technology or when, if ever, it should be deployed. Maybe kites are a better idea. Maybe not. But should the government decide?

It’s not just clean coal. As I wrote last week, Obama & Co. are ready to place bets on which companies and regions are likely to develop battery technology for electric cars. (See Uh-Oh: Obama’s battery gold rush).

Here’s another example of questionable industrial policy. This is the headline from an Energy Department press release that landed in my mailbox last week:

Secretary Chu Announces Nearly $50 Million of Recovery Act Funding to Accelerate Deployment of Geothermal Heat Pumps

Then there was this news from a company called Hearth and Home Technologies, a manufacture of wood stoves, pellet stoves and fireplaces which reported, approvingly, that

Under the 2009 Economic Stimulus legislation, U.S. homeowners who purchase a 75-percent efficient biomass (wood or pellet) burning stove, fireplace or fireplace insert and place it into service in their home during 2009 or 2010 can receive a 30-percent tax credit for costs incurred, up to $1,500.

Do you see the problem here? Just to be clear, I don’t have a position on biomass stoves and geothermal heat pumps. I just don’t think the government should have a position either.

To be sure, we need an energy revolution. Nothing less than the transformation of our fossil fuel-based economy into one that is cleaner and greener will solve the global warming crisis. Most important, we need to do whatever we can to spread that energy revolution to India, China and the rest of the developing world, because if we go green and they don’t, well, we’re still cooked. But how do we get from here to there? With clean coal? Electric-car batteries? Heat pumps? Wood stoves? Kites?

The unfortunate answer is no one knows. Not the president, not Congress, not Nobel laureate and energy secretary Chu, not venture capitalists or energy company CEOS or Fred Krupp or Jeff Immelt or Joe Romm. Our energy and climate problems are knowledge problems, too. And the best way to solve knowledge problems – which is to say the best way to spur technology change – is to create conditions that get lots of scientists and engineers to work on them, invite lots of investors to place their bets on which ones will work and then test those ideas in the marketplace. By aggregating thousands of decisions, markets will help us figure out which of today’s technologies or which ones yet to be invented get us closer to the clean energy economy we need.

Mind you, I’m not arguing here that markets alone will do the job. Forceful government action is needed to reshape markets and drive the clean-energy evolution. As my blogging colleague Jesse Jenkins has argued (as part of a friendly debate we’re having at The Energy Collective and elsewhere over energy policy), federal actions laid the groundwork for numerous technologies, including as microchips, commercial aviation, personal computing, the Internet, nuclear power and the railroads.

The real question is, just what form should the government action take? I’m all in favor of government funding for basic research, like the defense-oriented communications research that eventually made possible the creation of the Internet. I’m not opposed to the government using its considerable purchasing power to stimulate markets for electric cars or renewable energy, as it did when it installed a big solar power plant at Nellis Air Force Base in Nevada. But when it comes to energy and climate, I’d prefer to see a policy that is strong, simple, transparent, flexible and neutral when it comes to making technology choices. Outcome-based, if you will. A policy that uses a light but firm touch to unleash the power of markets to drive change.

This is what cap-and-trade, the centerpiece of Waxman-Markey, was supposed to do. Cap-and-trade puts a price on carbon, which is a jargon-y way of saying that it corrects a market failure, namely, the fact that people who burn fossil fuels (i.e., all of us) are not currently paying the costs of emitting global warming pollutants into the earth’s atmosphere. Cap-and-trade is an appealing policy because it addresses the fundamental problem—the global warming pollutants that cause climate change—but it is scrupulously neutral about the solutions. A carbon tax is an alternative way to accomplish the same thing.

Now I understand that the carbon price that would be created by Waxman-Markey’s cap-and-trade scheme is unlikely to climb high enough quickly enough to reshape energy markets and spur new technology. The EPA estimates that the carbon price—that is, the amount that polluters will have to pay to emit a ton of carbon—will be $11 to $15 in 2012, $13 to $17 in 2015, $17 to $22 in 2020, and $22 to $28 in 2025. That’s only pennies (or dimes or quarters) at the gas pump, the experts say, not enough to start a revolution. This is why there is so much more loaded into Waxman-Markey, including renewable portfolio standards, efficiency standards, more than $190 billion (through 2025) in clean energy and efficiency investments, and so forth.

But if the carbon price created by cap-and-trade under Waxman-Markey is insufficient, why not, then, raise the price or find another market-friendly way to promote clean energy, such as with a revenue-neutral $50-a-ton carbon tax or a hefty revenue-neutral gasoline tax, with all the proceeds being returned to American taxpayers in the form of lower payroll taxes (or rebates for poor or elderly people who don’t pay taxes.) That would reward consumers who live in smaller homes, use mass transit or drive drive smaller cars, and penalize those who choose to consume a lot of energy. The right price signals will do wonders to change people’s habits, as they did when gasoline prices spiked last year in the U.S. and as they have in Europe where gas taxes are high. Price signals are, quite simply, a more efficient way to promote change that prescriptive regulations: For example, ven under the Obama administration’s new CAFÉ standards for cars, U.S. cars in 2016 will be only about as efficient as European cars are now, Bryan Walsh reports in Time. That’s the power of markets.

Having said all that, Waxman-Markey may, unfortunately, be the best we can do in the current context. The environmental movement is politically weak. Coal-state politicians need to be won over. Neither the president nor Congress seem ready to begin a serious conversation with Americans about taxes, even those that are revenue neutral. Although some green groups say the bill won’t do nearly enough to address global warming, I was heartened last week to see that the World Resources Institute, a widely-respected NGO, released its own study arguing that the bill, as it now stands, would reduce GHG emissions by 28 percent below 2005 levels by 2020 and 75 percent below 2005 levels by 2050. See the chart below.

But I can’t help but feel that there’s going to be an enormous amount of waste and inefficiency along the way.

larsen_chartpreview

Watthead: In defense of big government

I’m on vacation this week, making my first trip to Israel where I’m visiting my aunt, a pioneer of the Kibbutzim movement. But I can’t shake off my Internet addiction, alas, and so I came across this response from Jesse Jenkins, AKA Watthead, to one of my blogposts last week bemoaning the Obama’s administration’s ever-increasing intervention in the economy. (See Uh-Oh: Obama’s Battery Gold Rush. Jesse responded at The Energy Collective, where the two of us blog.) Jesse, who works for the Breakthough Institute (and not the Breakthrough Collaborative as I said last week), believes that significantly more R&D spending from the government will be required to speed up the clean energy revolution. He’s thought a lot about this, and he’s also looked carefully at  the Waxman-Markey climate legislation now making its way through Congress, so I thought I would post his response here, with some minor edits. It’s well worth a look, and for those of you who care about energy policy, be sure to check out the links provided by Jesse.

I’ve spent the past two weeks digging deep into the Waxman-Markey ACES climate bill, peering beneath rocks and shining my flashlight into its dark recess to figure out what it will and will not do.  You can find that analysis at the Breakthrough Institute site here, and I highly recommend you take a look so you can get an accurate picture of what this “light touch-high impact” carbon pricing policy will actually accomplish.

The short answer: not very much at all.

The carbon price the bill will implement is likely to be between $12-20 per ton for the first decade-plus, according to the EPA analysis of the bill.  That’s about 12 to 20 cents per gallon of gasoline, which on the low end is about as much difference as you can find between different gas stations on two sides side of town, and on the high end is lost in the noise of seasonal variation in gas prices.  If you have little faith in the power of government, then I challenge you to explain how that kind of meager price signal is going to shift private investment and dramatically transform the $1.5 trillion combined U.S. energy and transportation markets.  Please, tell me a convincing story about how that might work, because after spending two weeks reading the Waxman-Markey bill, I could use some more uplifting news.

The reason the CO2 price will remain so low is because the bill allows up to 2 billion tons of offsets (up to 1.5 billion which may be sources from overseas) to be used in lieu of cutting emissions here in supposedly ‘capped’ sectors.  That’s enough to legally permit U.S. emissions to continue to grow at business as usual rates through 2030. So Waxman-Markey gives us no real “cap” on carbon and no significant price on carbon.  Forgive me for looking for other ways to directly spur the transformative clean energy innovation we need — ways you may consider unfortunate degrees of “government intervention.”  Given what’s at stake after all…

Also, as a kind of test to consider: many European nations have had gas taxes for decades that implement an effective carbon price in the hundreds of dollars a ton range ($2-5/gallon tax = roughly $200-500 per ton of CO2 equivalent carbon price!).  So with such a powerful signal for private investors to develop alternative fuel vehicles, why haven’t firms in Europe invented and commercialized electric cars?  Why isn’t everyone in Denmark driving EVs, one might ask?

The answer is because that’s not really how innovation works.  Price signals alone do not spur adequate innovation.  There’s a multitude of market failures at work, especially in the energy innovation sphere.  I have a paper coming out in about two weeks which I’ll share with my readers and the The Energy Collective community that spells out a lot of these market failures (prelude: knowledge spillovers, very high capital barriers and non-differentiated commodities are three big barriers to sufficient private sector innovation investments).  These are the kinds of market failures, which when combined with clear public imperatives for change, simply demand more active government engagement with innovation and industry than we all may find ideal.

For now, I’ll again challenge the typical assertions that private entrepreneurialism and investment (and the proper price signals) are all that’s required to spur transformative innovation by pointing you to my publication, “Case Studies in American Innovation: A New Look at Government Involvement in Technological Innovation” [PDF] for examples of how active federal government engagement and investment paved the way for so many of the technologies we now take for granted, including microchips, personal computing, the Internet, commerical aviation and jet engines, gas combustion turbines, nuclear power, wind power, solar power, etc.  Take a look and see why I’m not as skeptical of the role of government as you are.

Finally, as a (mostly) side note, since you cite Tesla Motors targeting luxury car markets with their electric Roadster as a reason they should not receive federal incentives: the reason Tesla is starting with a $100k electric luxury car is because new technologies are routinely more expensive at their launch.  If there isn’t a market for early adopters, the technology will never reach the economies of scale and spur the learning by doing (and continued innovation) that drops the price and improves the performance of the technology over time.  Think flat screen TVs or cell phones: the first ones are far more expensive than most can afford.  But now these technologies have reached economies of scale that drove dramatic price reductions and the technologies are affordable and (because of that) ubiquitous.

Tesla is looking to use luxury buyers – who routinely pay more for the cool new thing – to drive those initial economies of scale. They plan to produce the Roadster on a scale of 1,000s and at a cost of $100k.  Their next model will use the same (and now cheaper) components and batteries at a larger scale and will be a luxury sedan selling for around $60k and at a scale of 10s of thousands.  They then plan to produce a $35-40k sedan at a scale of 100ks per year, if all goes well.  That’s just smart.  Please don’t use that as a reason not to incentivize their technology’s development with public investment.  If the government were willing to directly purchase batteries and serve as the early adopter themselves — as we did for microchips, radios, radar, lasers, early computers, and jet engines — we could bring this emerging technology to scale and down in price much more rapidly and pave the way for the kind of dramatic private sector innovation that occurred AFTER the government purchasing (and loss-leading) dropped these technologies in price.  In short: we should be seeing far more direct public investment in the technologies to enable electrified transportation, not less.

Marc, I challenge you to wrestle with the history of innovation in a real honest way, and look for the role of government engagement in these technologies.  The energy innovation imperative is simply too critical to leave to well-established (but quite inaccurate) myths about the infallibility of private sector innovation and the supposed ineptitude of any government engagement in the market.  If the financial crisis taught us anything, I’d hope it was that we should revisit those myths with a pretty damned critical eye, eh my friend?